Perspectives on where our world is heading from a vantage point in Denver, Colorado.

30 July 2009

Long Term Unemployment At Record High

Unemployment sucks. Unemployment for more than six months (the duration of unemployment benefits) can be economically catastrophic. The percentage of the labor force that has been unemployed that long, 2.8%, is at the highest point it has been in more than 40 years.

The commentator I have linked to believes based upon past trends that "even if the current recession officially ended this month, the number of long term unemployed would probably continue to rise through the end of 2010."

The Great Depression was worse, but this recession is once again shaping up to be the worst economic pratfall since then.

The Denver Post's latest unemployment headline which reports that Latinos and men have been particularly hard hit with unemployment in this recession is correct, although the statistics used to support it which compare the current unemployment rates of different groups, don't prove that claim. The Post's statistics prove that they are currently having a harder time than the average person, but don't prove that this recession caused that to happen. To do that you would need to look at before and after unemployment rates.

In a not entirely unrelated bit of financial crisis news, the "cash for clunkers" program was suspended after four days because it was too popular and burned through its budgeted limit (just under a billion dollars). The program was designed to help troubled auto dealers and manufacturers while helping the environment and energy independence too. It encouraged owners of inefficient old cars off the street encouraging to trade them in for newer, more fuel efficient and less polluting new vehicles while turning the clunkers into scrap metal, with four figure government subsidies.

From an economic stimulus perspective, quicker is better than shorter. But, any program that runs out of money in just four days was clearly based on unsound expectations when it was passed.

Also importantly for auto makers, the plan shows that a fairly modest adjustment in prices has the potential to clear a lot of backlogged motor vehicle inventory, which could make it possible for automakers to get production of cars they have a reasonable chance of selling moving. Vehicle sales are down an average of 500,000 vehicles a month from "normal" levels overall in the U.S. About 250,000 vehicles were sold under this program in just four days. A boost in sales that was a fraction as intense as this one would return the industry to levels that would end the need for the huge layoffs of autoworkers that we've seen in recent months. Even if this didn't make automakers more profitable, this would be a very good thing, so long as they didn't lose money by lowering prices and increasing sales.

Before G.M. and Chrysler went bankrupt, each was first basically breaking even on every sale made, and then losing money on every car it sold. A big part of that was attributable to large legacy costs, like retired employee health benefits and interest on bonds, that remained fixed expenses even if production fell.

Now that these legacy costs have been shed to a great extent, and unprofitable products are being removed from the market, the possibility that we could see an American automaker make money selling cars doesn't seem beyond reach.

Then again, we've reached a point where even much better run Toyota, which has much better market share for many of its vehicles than its American competitors, and has a mix of vehicles better suited to the desires of current consumers, is losing money in North America due to declining sales. Then again, Toyota is just losing money now, and is doing so despite the fact that it hasn't gone bankrupt, so it is still paying all of its debts in full.